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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

May 2, 2018 (see May 16 and May 30 updates below). Next update: June 5, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).

The Euro fell by around 2% against the US$ in April, leaving it 10% higher than a year ago. The Japan yen fell by nearly 3% against the US$ in April, but is up more than 2% since this time last year. Both the Mexico peso and the Iceland króna fell by more than 3% against the US$ in April, and the Canada dollar strengthened slightly over the same period. The Jamaica dollar rose by 1.5% against the US$ in April, and is up by 2.5% against the US$ since this time last year. The Brazil real dropped by more than 5% in April, accelerating a decline which began at the end of January (generally credited to the cumulative effect of persistent declines in policy interest rates). The Venezuela bolivar fuerte registered another double-digit fall in April. The United Kingdom pound was steady against the Euro in April. The Swiss franc weakened by nearly 4% against the US$ in April, and by nearly 2% against the Euro - the Swiss franc has fallen by more than 10% against the Euro since this time last year, and has weakened from around 1.15/1Euro at the beginning of February to almost 1.20/1Euro now. The Sweden krona fell by 4.5% against the US$ in April. The Turkey lira strengthened against the Euro in April, but is still 26% weaker against the Euro since this time last year. The Russia rouble fell by over 8% against the US$ in April, and is down by nearly 9.5% against the US$ since this time last year. The official and parallel exchange rates of the Iran rial were unified in April (see below). The Israel shekel fell by around 2.5% in April. The downward drift of the South Africa rand over the last couple of months accelerated sharply with an almost 5% drop in April, although the rand is still up more than 7% against the US$ since this time last year. The China yuan weakened by 1% against the US$ in April, but is still down more than 8% since this time last year (see below). The official exchange rate of the North Korea won is up more than 5% since this time last year, almost matching the strength of the South Korean won over the same period. The New Zealand dollar fell by nearly 2.5% against the US$ in April. The Pakistan rupee is down by 11% against the US$ since this time last year, although there was little movement in April (there has been a great deal of commentary in Pakistan suggesting that the government has successfully engineered a devaluation of the rupee since the beginning of 2018). Oil prices are nearly 50% higher than they were a year ago, with international (er.) oil prices touching US$75 per barrel.

The possibility that UN sanctions (including oil export restrictions) will be re-imposed on Iran (related to its nuclear program) after May 12 (the date the US is scheduled to announce a decision) is probably at the root of why Iran has cracked down on the parallel market in the last couple of months; first putting many foreign exchange firms out of business in February, and then unifying the official and parallel rates early in April. In April, the 37000 rial/1$US and 60000 rial/1$US rates became a single official rate of 42000. But, in the still-existing parallel market, the parallel rate is now at around 56000; a parallel foreign exchange rate has existed for many years in Iran, and is unlikely to ever disappear. There was evidence of capital flight from Iran in the period leading up to the crackdown on the parallel market, pushing the rial down. By restricting foreign currency available at the official rate (Iran has plenty of foreign currency, both from petroleum and non-petroleum sources), Iran authorities are guarding themselves against possible future shortages of foreign currencies (principally US dollars),forcing many importers and others to find riyals in the parallel market, when they would have formerly been supplied at the official exchange rate.

Besides Iran, other countries have been the recent target of United States-led new and/or tightened tariffs and sanctions, some of which have already gone into effect, others which are scheduled to go into effect shortly. With regard to nuclear-related sanctions, besides Iran, the other target is North Korea. United States sanctions on Russia individuals and companies are based on a growing number of grievances, including Russia military support to the Syrian government, and have been particularly disruptive to the worldwide aluminum market, by restricting world supply from Rusal, the Russian aluminum company which is an important worldwide supplier, which has resulted in sharp increases in world aluminum prices. The United States has imposed limited sanctions on Venezuela due to human rights violations, and is considering stronger sanctions, such as restrictions on the purchase of oil from Venezuela. United States tariffs on steel and aluminum imports were intended to be applied to all countries (based on a national security concern for the erosion of US production), but the pattern of subsequent exemptions and statements by US officials and industry lobby groups suggests that, as expected, the principal target, is China (exemptions for Canada, Mexico and the EU have just been extended beyond a scheduled May 1 imposition date, South Korea has been totally exempted, leaving the tariffs in place for Russia, Turkey and Japan). China retaliated with tariffs on a broad range of US exports, and, since then, both the United States and China have started the process of imposing another group of tariffs on each other. Canada has been a particular target of United States tariffs, on wood and wood-related products (eg, paper) and on aerospace products , in both cases based on complaints of unfair government subsidies.

 China yuan and Hong Kong dollar May 2018

There have been some interesting recent developments with regard to the Hong Kong dollar (HK$). Hong Kong is part of China, but its political and economic system are separate, and part of this distinction includes the fact that the HK$ and the China renminbi yuan are also separate. For example, while the China renminbi yuan has moved up and down over the last few years, the HK$ has been fixed against the US$ within a band of 7.75/1US$ and 7.85/1$US since 2005. For virtually all of this time, the market value of the HK$ has been just a little above 7.75, but in the last couple of months the HK$ has been pushing on the 7.85 level (a weakening of the currency), to the extent that the Honk Kong monetary authority has confirmed that it spent HK$816 million to keep the HK$ below 7.85, which it said was necessary to offset some transactions in the London foreign exchange market (at an hour during which the Hong Kong foreign exchange market was closed). The Hong Kong fixed foreign exchange regime is a textbook example of a once-common foreign exchange regime, the currency board, where the fixed value of the currency is based not just on adequate foreign exchange reserves, but with every single HK$ bank deposit matched by US$ deposits. As such, the Hong Kong menu of short term rates (HIBOR) has to match equivalent US rates (such as the US fed funds rate for overnight HK funds), and there is some suggestion that one root of the recent HK$ weakness is that HK rates have not been quite high enough, falling behind recent interest rate increases in the United States.

There has recently been a brief flurry of speculation on whether the US dollar will, someday, be supplanted as the core currency of the world. The latest thoughts along this line have been based on moves by some sovereign governments to denominate some commodities and transactions in currencies other than the US$ (among these are China and Russia). It is easy to imagine scenarios where the US$ might, some day, lose its status to other currencies (e.g. China’s emergence as a leading world investor), but the reality is that, in the time since the 1971 abandonment of the US$ peg to gold, through many episodes (e.g. oil price shocks, sky-high inflation-killing interest rates, recessions, costly wars, a permanent trade deficit), the US dollar just “keeps on going”. The latest development in support of continued use of the US$ is that, right now, the US has the strongest (full employment of resources) and largest economy in the world, a status which will be enhanced (unevenly and with some resulting inflation, for sure) by the recent fiscal stimulus package; the result will be more jobs available in the U.S., more American goods and services available for world markets, and more worldwide demand for dollars to buy American products and to invest in (and move to) the United States. The demand for US dollars is currently being reinforced by long-term US treasury bond yields moving above 3% for the first time in a number of years, which will attract additional funds to US dollar-denominated assets. In a world with more than 100 currencies, the world needs a core currency in the same way that a barter economy needs money. The core currency does not have to be the US dollar forever, but that’s what it is now, and it is hard to see any current developments that will push it from this role in the near future.

May 16, 2018 update

 Argentina peso May 2018

Argentina has applied for a US$ stand-by credit from the IMF (of at least US$20 billion) on May 8, 2018. (IMF is FMI in Spanish, as can be seen on placards carried by protestors in Buenos Aires – the IMF remains deeply unpopular in Argentina). From the beginning of 2018 to the end of April 2018, the Argentina peso fell in value by about 11% against the US$, which was perhaps not too far out-of-line with current and recent Argentina rates of inflation (inflation is currently running at an annual rate of around 25%, according to the latest readings) But, in the first few days of May, the peso began to drop sharply, taking it to around 25/1$US in the middle of May, a 25% decline since the beginning of May, and this came after sharp increases in Argentina interest rates at the end of April, and the purchase of pesos (=sale of US dollars) by government authorities to support the currency. Since the election of President Macri in December 2015, Argentina has been following an economic policy path which could be characterised as broadly consistent with what the IMF might have required if it had been in charge of the Argentina economy, including reductions in the growth of government spending, reductions of energy subsidies for consumers, a floating peso, and tax changes to improve the investment climate. (Indeed, the response by the IMF to the Argentina request mentioned “strong support for Argentina’s reforms to date”, and pointed the finger at “renewed and significant financial market volatility”) These government measures drew broad approval among international investors (who have indicated their supported by buying new issues of Argentina foreign currency debt). But, whatever the assessment of the success of these policies, they have not yet proved enough to reduce inflation below double digit levels, and inflation at these levels dominates all other influences on the exchange rate (for Argentina, these include international market for its agricultural exports, such as soybeans and wheat). An emerging talking point is whether what is happening in Argentina is part of what is about to happen in other emerging economies which are coping with higher US interest rates and renewed increases in oil prices, or whether Argentina is in a class by itself – the jury is still out on this, but, so far, the abrupt fall in the peso has not yet been matched by other countries whose currencies are also under downward pressure (e.g. Turkey).

May 29, 2018 update

As we reach the end of May, with continuing strength in the US economy and the possibility of more increases in US interest rates, every other country in the world has had to reconsider their domestic interest rates, on the understanding that if their interest rates don’t move up, then their exchange rates vis-à-vis the dollar may have to move down. (One currency which has been under a lot of pressure in the latter part of May has been the Turkey lira –more on this next month). Ongoing developments in the world of exchange rates include: the continuing evolution of threats of tariffs on each other by the United States and China, which will impact other countries which are part of supply chains or which are caught by the US national security justification for tariff changes; the BREXIT negotiations between the United Kingdom and the European Union; and the NAFTA negotiations among the US, Canada and Mexico.

There are media reports (e.g, Reuters) suggesting that the European Union is looking for ways to suggest how European businesses can get around the re-imposition of US sanctions on Iran, one of which may be to pay for oil by making money transfers directly to the Iran central bank. (European and American businesses both moved quickly into Iran after sanctions were lifted in 2016.)….A group of 154 German economists wrote an open letter (short but full of content) to the Frankfurter Allgemeine Zeitung on the future of the European Union – one phrase in the letter which especially struck WCO was a suggestion that it is time for the European Union to develop a path for countries, which cannot “keep up” with fiscal and other EU requirements, to leave the Euro zone. (“The eurozone needs an orderly insolvency procedure for states and an orderly withdrawal procedure”)….A brief IMF commentary after an official visit to Uzkbekistan suggests that the September 2017 measures to eliminate the parallel foreign exchange market in Uzbekistan have worked….Question: is Somalia close to issuing a new currency, and how will it deal with the massive amounts of privately-issued currencies (“counterfeit”) which have filled some of the money gap for the last thirty years?....And it should be mentioned that the recent 200th birthday of Karl Marx is a reminder that some familiarity with the Marxist-Leninist approach is helpful in understanding exchange rate and other policies by the remaining Communist countries around the world, the largest of which is, of course, China (population approaching 1.5 billion), but also includes Vietnam, North Korea and Cuba, not to mention several other countries in Africa and Asia which have adapted the Marxist-Leninist approach to their particular challenges.

The latest development in the five-year-old downward spiral in Venezuela: new US sanctions related to Venezuela debt, issued by President Trump. The exact language regarding what is prohibited is as follows: “All transactions related to, provision of financing for, and other dealings in the following by a United States person or within the United States are prohibited: (i) the purchase of any debt owed to the Government of Venezuela, including accounts receivable; (ii) any debt owed to the Government of Venezuela that is pledged as collateral after the effective date of this order, including accounts receivable; and (iii) the sale, transfer, assignment, or pledging as collateral by the Government of Venezuela of any equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest.” The language with regard to justifications mentions: “ endemic economic mismanagement and public corruption at the expense of the Venezuelan people and their prosperity, and ongoing repression of the political opposition; attempts to undermine democratic order by holding snap elections that are neither free nor fair; and the regime’s responsibility for the deepening humanitarian and public health crisis in Venezuela.

(World Currency Observer will next be updated on June 5, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).)